Provisional Sum Meaning
A Provisional Sum is a designated budget within a construction contract for work that is not fully detailed or priced at the time of signing. It serves as an estimate for items or tasks whose exact requirements remain uncertain, allowing flexibility in cost as project details become clearer.
How Do Provisional Sums Work?
Provisional sums allow for cost adjustments in a primarily fixed-price contract when final details emerge. They reflect the actual cost of work once it becomes clearer, ensuring the principal pays only for what is needed. These sums let a project start even if design elements are incomplete, offering flexibility until exact requirements are confirmed.
- Adjustment to Final Cost: The contract sum changes to match the actual cost of the provisional work.
- Maintaining Flexibility: Principals can commence construction without a fully finalized design.
- Early Contractor Involvement (ECI): Another approach that lets projects begin before design completion.
- Transparency and Documentation: Accurate records and approvals ensure all parties agree on final costs.
Provisional sums help manage uncertainties within a construction contract. They protect both the principal and contractor by accommodating changes, updates, or additional work discovered during project execution.
Provisional Sum vs. Prime Cost
A prime cost usually covers only the cost of supplying an item, while a provisional sum accounts for both supplying the item and any related work. However, under standard contracts like AS 2124 and AS 4000, prime costs often fall within the definition of provisional sums, making their treatment nearly identical in practice.
- Prime Cost: Limited to the cost of the item.
- Provisional Sum: Includes item cost plus associated labor or services.
- Contract Treatment: Both are commonly managed the same way under many contract forms.
Although the difference between provisional sum and prime cost can be subtle, clear documentation of each expense ensures accurate budgeting and helps avoid disputes.
Understand the key differences between prime cost and provisional sum to manage project budgets effectively.Provisional Sum vs. Rise and Fall Clause
A provisional sum addresses scope items not fully defined when the contract is signed. It adjusts once final details emerge. In contrast, a rise and fall clause accommodates fluctuations in a builder’s costs for the agreed scope, allowing the contract amount to move up or down based on changing labor or material expenses.
How to Calculate and Adjust Provisional Sums in Construction Contracts
To calculate the adjustment, identify the actual cost of the provisional sum work and then add overheads and profit according to your contract’s terms. Standard Australian contracts like AS 4000 (clause 3) or AS 2124 (clause 11) often outline these rules, but the precise method can vary. Below are key considerations:
1. Determine Actual Cost
- This usually reflects the amount paid (or payable) to subcontractors or suppliers.
- Keep accurate records of invoices, purchase orders, and labor costs to support your claims.
2. Apply Overheads and Profit
- Fixed Percentage: Some contracts apply a set percentage to the entire cost of the work.
- Difference-Based: Others apply a percentage only to the difference between the provisional allowance and the final, actual cost.
- Confirm whether your contract already accounts for some overheads in the original provisional sum calculation.
3. Verify Contract Provisions
- Review clauses on prime costs and provisional sums to understand how to calculate overheads, profit, and any other charges.
- Check if the contract prescribes documentation requirements or approval steps for each cost item.
4. Maintain Transparency
For example, suppose a contract includes a provisional sum of 10,000 for specialized equipment. The actual cost ends up at 12,000, and the agreed overhead and profit is 10%. The revised cost becomes 12,000 + (10% of 12,000) = 13,200, which means a 3,200 increase to the contract sum.
Track and manage provisional sums easily with Mastt. Stay on budget with real-time insights.Provisional Sum Examples
Provisional sums address uncertain project components, such as specialized equipment or unforeseen site conditions. They allocate funds for items not fully detailed at the start, ensuring cost control and flexibility when new requirements emerge.
| Example |
Explanation |
| Special Equipment |
Funds set aside for new machinery or systems identified during construction |
| Unforeseen Ground Conditions |
Allocation for extra excavation or stabilization if unexpected soil issues occur |
| Design Modifications |
Contingency for design changes or revisions requested by stakeholders |
| Regulatory Compliance |
Budget for meeting additional regulations that arise mid-project |
Thorough oversight, documentation, and approvals help ensure proper use of provisional sums, prevent budget overruns, and maintain transparency among all parties involved.
Key Aspects and Considerations of Provisional Sums
Provisional Sums revolve around budgeting, oversight, and timely adjustments. In construction projects, contract administrators and project managers must document items, secure approvals, and track actual costs to maintain transparency and avoid overruns.
- Purpose: The inclusion of provisional sums allows for the allocation of funds for uncertain aspects of the project without needing comprehensive details at the outset. It provides flexibility to accommodate changes or additional works that are identified as necessary during the project's execution.
- Types: Provisional sums can be divided into two main types: defined (where the work is described but quantities and costs are not known) and undefined (where both the nature and costs of the work are not known).
- Management: The management of provisional sums requires careful oversight by the contractor, superintendent, and principal. As the project progresses and the details of the work covered by provisional sums become clearer, these items need to be priced accurately, and the contract adjusted accordingly.
- Documentation and Approval: Before spending a provisional sum, the contractor usually needs to obtain approval from the superintendent or principal, depending on the contract's terms. The work must be documented, including the scope, cost, and justification for the expenditure, ensuring transparency and agreement on the adjustment of the provisional sum.
- Impact on Project: The use of provisional sums can affect the project's budget and timeline. Effective management and timely decision-making regarding provisional sum items are crucial to prevent delays and manage the project's financial health.
Incorporating provisional sums into construction contracts provides a mechanism for dealing with uncertainty and ensuring that funds are allocated for unforeseen aspects of the work. Proper management of provisional sums is essential to maintaining control over project costs and schedules, facilitating smooth project execution despite the inherent uncertainties of construction projects.
